Reforming the U.S. Social Security system accounting for employment uncertainty

The discussion about the need for Social Security reforms has recently resurfaced, and is expected to continue to be part of the political agenda in the near future. Our paper is a step in the direction of providing a framework for policy analysis that accounts for employment uncertainty, something that has been relatively overlooked in terms of its link with retirement decisions. In this context, we explicitly consider the participation decision of older individuals along with their decision to claim Social Security retirement benefits, using a sequential decision structure. We have numerically solved and simulated a benchmark model of the inter-temporal decision problem that individuals face in the United States. Our results show that the model is able to explain with great accuracy the strikingly high proportion of individuals who claim benefits exactly at the Early Retirement Age. The model is also able to replicate the declining labor force participation at older ages. Additionally, we discuss a number of policy experiments that suggest that individuals claiming and labor supply decisions are responsive to measures likely to be on the table for policy makers when considering the reforms of the U.S. Social Security system.